From a legal compliance perspective, we help everyone understand the importance of crypto funds for investors.
Written by: lris, Bai Qian
About half a month ago, Lawyer Mankun wrote an article (What are the differences between funds and foundations? A must-read for compliant operation of Web3 projects), which detailed the concept of crypto funds and applicable scenarios. In summary, a crypto fund is a form of collective investment where investors are responsible for providing and counting money, while the crypto fund is responsible for finding Web3 projects to invest and profit.
It seems that crypto funds should be very popular investments. However, in practice, many of the clients that Lawyer Mankun has encountered, especially non-Web3 native investors, are unclear about 'why they need crypto funds? What are the benefits of establishing a crypto fund?'
Therefore, Lawyer Mankun wrote this article to help everyone understand the importance of crypto funds for investors from a legal compliance perspective.
Limitations of Individual Investment
In recent years, the investment wave of Web3 has been continuously rising, attracting more and more individuals and institutions into this field. From cryptocurrencies to NFTs, from DeFi to GameFi, various projects are emerging, seemingly with opportunities everywhere. However, Web3 investments are not as simple as they appear; the underlying legal and compliance issues can catch many investors off guard.
Especially for high-net-worth investors, although personal investment methods seem flexible and free, in actual operations, whether it is the depth of information acquisition or the systematic nature of risk management, the mode of lone fighting often fails to meet complex investment needs. More importantly, in a field characterized by rapid technological iteration and changing legal regulatory environments, individual investors not only need ample time and expertise but also need to deal with non-negligible compliance risks, which raises higher requirements for their investment capabilities:
Information Asymmetry. The development of the Web3 sector is changing rapidly, with new projects emerging every day, but their quality varies significantly. On the surface, many projects promise to 'transform the future,' but in reality, they may just be scams wrapped in technology. For Web3 investors, selecting truly valuable long-term investment targets from numerous projects is undoubtedly a huge challenge. Especially when it comes to cross-border investments, the complex legal environment and cultural differences further exacerbate the problem of information asymmetry.
Concerns of High Volatility. The Web3 investment market is known for its high volatility; although it brings enormous wealth creation opportunities, it also carries a similarly high probability of failure. Individual investors in Web3 often tend to concentrate their funds on a few projects due to resource limitations. This strategy, while appearing to yield higher returns in the short term, exposes them to extremely high risks due to lack of diversification.
Compliance Challenges. The globalization of Web3 makes its legal and regulatory environment extremely complex. For Web3 investors, individual investments not only face the risks of the projects themselves but also need to handle compliance issues in cross-border transactions, such as foreign exchange management, tax reporting, and the classification of token legal attributes. If not handled properly, it can lead to unexpected legal problems.
Insufficient Professional Support. Web3 investments are not simply about 'buying low and selling high'; they also involve a series of professional operations such as project due diligence, technical assessments, and market analysis. For Web3 investors, lacking professional team support means they cannot fully assess the potential risks and opportunities of their investments.
Limitations of time and energy. Web3 investors, especially non-native users, are busy with daily affairs and find it difficult to devote sufficient time and energy to managing Web3 investments. However, Web3 investments require real-time tracking of market dynamics and handling complex technical and legal issues, which places extremely high demands on the time and energy of individual investors.
Advantages of Crypto Funds
The limitations of individual investment pose many obstacles for high-net-worth individuals to participate in Web3 investments, while crypto funds, with their specialized operations and systematic management, become an important tool to overcome these challenges.
First, the fund systematically selects quality projects through in-depth due diligence by a professional team, solving the problem of information asymmetry. The fund's investment analysts evaluate target projects from multiple angles, such as technical architecture, team background, and market prospects, and use on-chain data to monitor the health of their ecosystem, ensuring that each investment is based on solid data. Additionally, the fund's global network allows it to cover premium projects in multiple regions worldwide, making it easy for investors to access the most cutting-edge Web3 investment opportunities.
Secondly, crypto funds hedge the high volatility risk of the Web3 market through a diversified investment strategy. By allocating funds to various areas such as stablecoins, DeFi, and NFTs, the fund avoids the concentrated risks brought by failures in a single track. Meanwhile, the fund management team monitors market dynamics in real-time and flexibly adjusts the investment portfolio according to market changes, creating more stable return expectations for investors in a professional manner.
Moreover, the team-based operation of crypto funds provides high-net-worth investors with full-process support, covering all aspects of investment from due diligence to project management. The fund team not only helps investors solve complex issues such as technical assessment and legal compliance but also regularly publishes detailed investment reports, allowing investors to keep track of investment progress without spending a lot of time and energy.
Compared to the lone fighting mode of individual investors, crypto funds can effectively avoid issues such as information asymmetry and concentrated risks through team-based professional support. This also meets the higher demands of Web3 investors for wealth security, giving crypto funds a natural advantage in Web3 investments.
Compliance is Key
In many previous Web3 investment consultations, a commonly asked question by clients was: 'Is my investment in Web3 illegal? How can I invest safely?' Every time faced with such doubts, Lawyer Mankun's answer has been: It is recommended to establish a crypto fund.
In the wave of Web3 investments, crypto funds can not only solve project selection and risk management issues through specialized operations, but more importantly, they can help investors enter this complex and ever-changing market in a legal and compliant manner. This is particularly crucial for high-net-worth investors in China, where virtual asset trading is strictly restricted, making compliance especially important, and crypto funds demonstrate unique advantages in this area.
1. Legal Structure
Crypto funds typically operate by registering professional investment institutions and selecting legal fund structures that meet international regulatory requirements, providing clear legal protection for investors. For example, Lawyer Mankun has previously shared that some mainstream crypto funds choose to register in the Cayman Islands, Singapore, or Hong Kong, which provide a relatively relaxed legal environment for crypto asset investments while reducing costs for investors in terms of tax benefits and ease of fund movement.
It is particularly noteworthy that due to foreign exchange management policies, individual investors in China face greater difficulties in directly participating in cross-border investments. However, by establishing a compliant RMB fund pool, crypto funds convert funds legally into foreign currency, helping investors connect with international markets in a professional manner, avoiding legal risks that may arise from incomplete procedures in personal operations.
2. Compliance Operations
The globalization of the Web3 sector makes its regulatory environment extremely complex, with significant differences in the definition and regulatory requirements for virtual assets across different countries. For example, the United States has strictly defined the securitization attributes of certain tokens, while China has explicitly prohibited virtual currency trading activities.
Therefore, in order to provide comprehensive compliance support to investors, the fund team usually collaborates with legal experts familiar with local regulatory policies. Lawyer Mankun's firm has previously provided the establishment services of crypto funds for numerous Web3 investors. During the establishment process, we provide detailed legal analysis and compliance advice tailored to different countries' investment projects to ensure that investment activities comply with local laws.
3. Strict Anti-Money Laundering and KYC
Due to its decentralized characteristics, the Web3 investment market often becomes a high-risk area for illegal activities such as money laundering. For individual investors, it is challenging to verify the background of project parties or trading parties when participating in such transactions, and a slight mistake may lead to involvement in illegal activities.
Crypto funds must strictly adhere to anti-money laundering (AML) and know your customer (KYC) systems during their operations, ensuring the legality of fund sources and the transparency of investment activities through measures such as reviewing investor identities and monitoring fund flows. This not only effectively reduces the legal risks of the fund itself but also provides investors with a safer investment environment.
4. Dispersed Legal Liability
Individuals directly participating in Web3 investments may face legal liability due to project violations or legal changes. However, by investing through crypto funds, investors, as limited partners, only bear limited liability for their invested portion, while the fund management team is responsible for the actual investment operations and legal compliance. This mechanism of liability dispersion provides investors with higher legal security.
At the same time, the asset isolation mechanism of crypto funds strictly separates investor funds from the assets of the fund management team. This isolation not only prevents the debt issues of the fund management team from affecting investor rights but also ensures the independence and safety of investment funds, further enhancing the trust of high-net-worth individuals in the fund's operations.
Summary by Lawyer Mankun
Facing the high risks and high potential of the Web3 investment field, crypto funds, with their unique specialized management and compliance operations, become the best choice for high-net-worth investors to participate in this field. However, when establishing a crypto fund, choosing a suitable jurisdiction is particularly important. Different regions have different regulatory requirements, tax policies, and operational flexibility for crypto funds, directly impacting the fund's compliance and cost efficiency.
As Hong Kong gradually opens its policies in the field of virtual assets, various favorable policies have emerged, providing strong support for the establishment of crypto funds. At the same time, Hong Kong's geographical location at the crossroads of East and West also makes it an ideal bridge for global capital to enter the Web3 market.
Currently, Lawyer Mankun's firm has a team of experienced professionals in Hong Kong that can provide one-stop crypto fund establishment services for Web3 investors. From site selection assessment to registration completion, and then to cross-border compliance review, we will combine the localized policy environment with a crypto-friendly legal framework to help investors achieve safe and compliant asset investments. If you are considering establishing a crypto fund or need to know more details, feel free to contact Lawyer Mankun at: mankunlawyer (WeChat ID), and we will safeguard your Web3 investment journey.